Alaska Bond Rating Downgraded from AAA to AA+ - P.O.W. Report

Wednesday, January 6, 2016

Alaska Bond Rating Downgraded from AAA to AA+

Standard & Poor's Ratings Services lowered its rating to 'AA+' from 'AAA' on Alaska's general obligation (GO) debt, and its ratings to 'AA' from 'AA+' on the state's appropriation-backed debt. We also lowered our rating to 'A+' from 'AA' on some bonds that were issued by the Alaska Energy Authority and are backed by a moral obligation pledge from the state. The outlook on all debt ratings is negative. 
Much about Alaska's recent economic and fiscal experience is summed up by collapsing oil prices on the global markets and declining production on Alaska's North Slope. Reflecting its linkage to the commodity markets, Alaska's economy has begun to contract and is out of step with the U.S. economy, which continues to expand. For much of the past 40 years, taxes and royalties on oil production have been sufficient to pay for a majority of the state's general fund expenses. For instance, in fiscal 2012 when Alaska North Slope (ANS) west coast spot prices averaged $112.65 per barrel, the state brought in nearly $9.5 billion in total unrestricted revenue. But by the spring of 2015, the state's ANS oil price forecast -- $66.03 per barrel in fiscal 2016 -- was projected to produce just $2.2 billion in unrestricted general fund revenue. Consequently, despite having cut spending by 16% relative to the prior year, the state's fiscal 2016 budgeted appropriations still exceeded anticipated revenues by $2.7 billion, a shortfall equal to 54% of budgeted expenditures. Lawmakers covered the gap in the budget by authorizing a transfer from the state's Constitutional Budget Reserve (CBR), albeit only after first getting hung up in the negotiating process.
Stabilizing the state budget in the manner proposed by the governor involves a wholesale redesign of the state's financial architecture, however. Not surprisingly, some of the individual components of the proposal have already been met with resistance by some members of the legislature and other stakeholders. And if the politics of enacting a fiscal overhaul prove too politically difficult, resulting in inaction this year, the state's options will narrow. On a combined basis, Alaska's various budget reserves currently total about $15.7 billion (PFER, CBR, and statutory budget reserve). While reserves at that level remain comparatively strong, it's unlikely they can be sustained, considering the state is operating with a $3.5 billion structural deficit this year. [Source]

Governor's Response:

“The action taken by Standard & Poor’s to lower Alaska’s credit rating is concerning and premature given that the legislature has not had time to act on a long-term fiscal plan. However, this further solidifies the need to address our state’s fiscal challenges in the immediate future. As noted in S&P’s release today, Alaska has significant financial assets that, if properly utilized, can help build fiscal stability for our state. I agree with S&P that the stakes are high for Alaska to enact a sustainable fiscal package, but it’s important to do what is right for our state’s future versus what may be politically appealing. As we approach the 2016 legislative session, I encourage every legislator and Alaskan to read the memos released by Standard & Poor’s and Moody’s in their entirety. I look forward to working with lawmakers to enact a complete fiscal package that protects the opportunities available to future generations of Alaskans.” –Governor Bill Walker

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